Sunday, 17 January 2016

Land Reform Bill - "open assignation" of 1991 Act tenancies through the back door?

The following is the text of a letter I've sent to Steve Sadler, head of the Scottish Government's Land Reform and Tenancy Unit:-

11 January 2016

Dear Mr Sadler

Land Reform Bill Part 10 - Agricultural Holdings

I’m writing to draw attention to an aspect of Part 10 with potentially far reaching consequences but which I believe has slipped under the scrutiny radar during Stage 1.

As is inevitable with agricultural holdings law, the point is technical but the nub of it is that an unnoticed sub-paragraph at the end of the schedule to the bill - which purports to contain merely “minor and consequential modifications” - has the effect of introducing, almost by stealth, open assignation (i.e. transfer to anyone in the open market, not merely to a family member) of 1991 Act tenancies following a tenant’s death. And even the Scottish Government itself has conceded that open assignation is “too broad an approach”.

In more detail, look at paragraph 12(2)(b) of the schedule to the bill (page 108) [bill here]. This inserts the innocuous looking words “the lease of a 1991 Act tenancy or” into section 16(2A)(b) of the Succession (Scotland) Act 1964. I annexe an extract from that section with an explanation if you’re interested in following through the legals. But if not, the effect of adding these words is that the executor of a deceased 1991 Act tenant could transfer his lease to anyone, not just a relative, near or otherwise.

The Succession Act is not the whole story, however. One also has to consider the landlord’s options for objecting to a new tenant in a 1991 Act tenancy contained in the agricultural holdings legislation. Revised arrangements for these are contained in clause 89 of the Land Reform Bill introducing new sections 12A (for transferees who are near relatives) and 12B (for transferees who are not near relatives) into the 1991 Act. 12B is the relevant one in this context and here I believe there may have been a misunderstanding by the RACCE Committee as to its effect. Paragraph 505 of the Stage 1 Report [report here] says (last sentence):

“Where the legatee was not a near-relative, the Land Court would consider whether there was a reasonable ground for the landlord's objection.”

Strictly speaking, the reference to a legatee there should be a reference to a legatee or a person (referred to as an “acquirer”) to whom the tenant’s executor transfers the lease absent, as is usually the case, a valid legacy. But the point is the words I have underlined in the above quotation from the report: these do not reflect what 12B says. (The RACCE Committee members may have been misled by the second sentence of para. 381 of the Policy Memorandum [policy memo here] which, although under a heading which refers to succession, is actually talking about the different provisions for lifetime assignation.)

What 12B actually says is that, if a landlord objects to receiving a non-near relative acquirer as tenant, he (landlord) can serve a “counter notice” which is, in effect, a notice to quit (12B(2)(b)). The acquirer can appeal against this to the Land Court (12B(3)) and the Land Court must quash the counter notice (i.e. confirm the acquirer as tenant) if the acquirer can establish “any reasonable ground” for being accepted as tenant (12B(4)). Presumably “I am an established farmer with a proven track record, of good character and adequately resourced to take this farm on” would have to be regarded as a “reasonable ground” for being accepted as a tenant. The landlord would have the opportunity to attempt to rebut the acquirer’s case but if he cannot do so, there is no provision in 12B for the landlord to introduce his own separate ground of objection. That being so, the result is that there is no practical difference between transfer to a near relative (see 12A) and transfer to anyone else, including a total stranger. (Scottish Land & Estates called the landlord’s supposed enhanced ground of objection to a non-near relative acquirer “illusory”.)

If you are still with me (and I realise this is all highly technical), the practical end result is open assignation following the death of a 1991 Act tenant. I doubt that can have been the policy intention considering that, as recently as its letter of 4th December to the RACCE Committee with its proposals to flesh out clause 79 of the bill (conversion of 1991 Act tenancies to MLDTs), [letter here] the Scottish Government described open assignation as “too broad an approach” (para. 23) (Admittedly, the SG was talking there about open assignation during the tenant’s lifetime rather than after his death as I am here but there is no reason to distinguish the two situations: the AHLRG, indeed, recommended (para. 162) [AHLRG Report here] harmonising lifetime and death transfers.)

Case study

It’s late 2016 after the Land Reform Bill has been enacted and come into force and James, a tenant under a 1991 Act tenancy, is a widower in his late 70s.

Neither of James’ two children are farmers: one is an actor and the other is a thoracic surgeon and they are thus both ineligible to succeed him in the tenancy because they would be vulnerable to an objection by the landlord on the basis of their lack of farming experience. James has no other farming relatives within the class prescribed in clause 84 of the bill interested in taking an assignation of the lease. And, for whatever reason, it had not been possible to arrange an assignation to a new entrant or “progressor” under clause 79 (as proposed to be amended per the SG’s letter of 4/12/15) by the time James died, still in harness as tenant under the lease.

James’ executor will be entitled - indeed obliged - to attempt to sell the tenancy on the open market with a view to realising its value for distribution to James’ children as his heirs. The executor receives two offers, one from a new entrant and another much higher one from Agribiz PLC, an established farming company -  its impeccable reputation is the “reasonable ground” for it to become the new tenant under the procedure in s12B for transfers to parties who are not near relatives. James’ executor - whose legal duty is to maximise the value of the deceased’s estate rather than promote the interests of new entrants - is obliged to accept Agribiz’s offer. Faced with the loss of the farm forever (because a company never dies), the landlord is forced to outbid Agribiz and James’ executor eventually renounces the tenancy to the landlord in exchange for a substantial sum.

That result is a travesty of the policy intentions and an ECHR car crash - the landlord has been forced to pay to recover his property rights and the farm has not even gone to a new entrant!

I am a retired solicitor who used to specialise in rural and agricultural law and continue to retain a keen interest in the subject. You will no doubt wish to consult SG lawyers and you/they should not hesitate to contact me if you/they would like any clarification of my thought processes here. You are also welcome to share this with other SG or parliamentary officials, ministers and MSPs.

Yours sincerely

Neil King

cc. Alex Fergusson MSP


Extract from section 16 of the Succession (Scotland) Act 1964 - words in underlined bold inserted by para. 12(2)(b) of the schedule to the Land Reform Bill.

(2) … where … an interest [under a lease held by a deceased tenant] … is not the subject of a valid bequest by the deceased … and there is among the conditions of the lease (whether expressly or by implication) a condition prohibiting assignation of the interest, the [deceased tenant’s] executor shall be entitled, subject to subsection (2A) of this section, to transfer the interest.

(2A) Transfer by an executor pursuant to subsection (2) of this section-

(b) of an interest under any lease (other than the lease of a 1991 Act tenancy or the lease of a croft within the meaning of section 3(1) of the Crofters (Scotland) Act 1993 (c.44)) and which is not a transfer to one of the persons entitled to succeed to the deceased's intestate estate … in satisfaction of that person's entitlement … shall require the consent of the landlord.

A brief explanation of this is that a tenant’s interest under a lease containing a clause prohibiting assignation (which most leases do) cannot be bequeathed by a legacy in the tenant’s will, a legatee being functionally the same as an assignee during lifetime.  A deceased tenant’s interest under a non-assignable lease therefore falls to be dealt with as part of his intestate (not disposed of by will) estate. Before the law was changed by the Succession (Scotland) Act 1964, an interest under a lease, being heritable property, passed on intestacy to the deceased tenant’s “heir-at-law” (a single close, preferably male, relative identified by the rules of primogeniture). The 1964 Act changed that so that, henceforth, intestate heritable property would be distributed in the same way as intestate moveable property, that is shared equally between the deceased’s closest relatives of the same degree irrespective of sex. Leases being indivisible, however, a special case had to be made for them. Section 16(2) of the Succession Act therefore provided that the executor of a deceased tenant might transfer his interest in the lease irrespective of a prohibition on assignation. But that is subject to a proviso in sub-section (2A) that a transfer to anybody other than one of the intestate heirs requires the consent of the landlord. An exception is made for crofting leases (i.e. they may be transferred by a deceased crofter’s executor to a stranger without the landlord’s consent but that is only because transfers of crofting tenancies are at the discretion of the Crofting Commission under the crofting legislation rather than the landlord). Para. 12(2)(b) of the schedule to the LR Bill now adds 1991 Act tenancies as another exception with the consequence that the executor of a deceased tenant can transfer one to anybody without the landlord’s consent.